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Shaping a Constructive Regulatory Environment

This document analyzes how regulation influences ratings within the financial sector, focusing on five key areas. It discusses the expected regulatory solvency position, sources of additional capital, and options for reducing capital requirements. The methodology from Fitch and insights from CEIOPS QIS4 reports provide a framework for assessing capital adequacy and regulatory compliance. As highlighted, while QIS 5 offers more clarity, challenges remain in understanding the full impact of regulation on financial stability and credit ratings.

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Shaping a Constructive Regulatory Environment

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  1. Shaping a Constructive Regulatory Environment Greg Carter 9th June 2010

  2. Agenda How does Regulation impact ratings? 5 Key areas of analysis Conclusion

  3. Agenda How does Regulation impact ratings? 5 Key areas of analysis Conclusion

  4. Analytical Methodology Source: Fitch 3

  5. Methodology – Where does Regulation sit? Source: Fitch 4

  6. Methodology – What does Regulation influence? Source: Fitch 5

  7. Agenda How does Regulation impact ratings? 5 Key areas of analysis Conclusion

  8. 1) Expected Regulatory Solvency Position Solvency Ratios From QIS4 Compared With Solvency I Source: CEIOPS QIS4 final report

  9. 2) Sources of Additional Capital Capital Shortfalls in QIS4, Selected Countries Source: CEIOPS QIS4 final report

  10. 3) Options for Reducing Capital Requirements QIS4 Solvency Capital Requirement (SCR) Composition Source: CEIOPS QIS4 final report

  11. Interest rate risk Equity risk Property risk Spread risk Concentration risk Currency risk Less diversification (%) 160 140 120 100 80 60 40 20 0 -20 -40 -60 Non-life Life Composites 3) Options for Reducing Capital Requirements (cont) QIS4 Composition of Required Capital for Market Risk Source: CEIOPS QIS4 final report

  12. 4) Own Funds composition & Allowance for Hybrids • Tier 1 or Tier 2? • Grandfathering? • Longer term impact on Financial Flexibility

  13. 5) Internal Model Use • “Solvency II compliance” • The Use Test • Partial model • Comparability and Transparency

  14. Agenda How does Regulation impact ratings? 5 Key areas of analysis Conclusion

  15. Conclusion • QIS 5 brings some clarity, but the picture is still not clear • QIS 5 results will bring the capital landscape into focus • Regulatory capital is one part of our Capital Adequacy analysis • Capital Adequacy is one part of our Credit Rating

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